If We Ever Get Out of Here - What Will It Take to Break Canada's Infrastructure Logjam?

Western Canada has extraordinary oil and natural gas resources, but producers there have been suffering from a long list of woes. Oil sands producers need higher oil prices to justify expansion projects, and face shortfalls in pipeline takeaway capacity to refineries in Eastern Canada and export markets on both coasts. Natural gas producers can move gas east, but face stiff competition from the Marcellus and Utica plays; meanwhile, their efforts to expand LNG exports from British Columbia have been stymied by the new glut in worldwide LNG supplies and low LNG prices. Today we discuss the challenges in advancing Canadian oil and gas infrastructure projects.

Canadian energy production and the pipelines, rail facilities and other infrastructure needed to move oil and natural gas to market have been frequent topics in the RBN blogosphere. In Over the Hills and Far Away, we considered the challenges faced by oil sands producers in Alberta, namely that 1) their hydrocarbon-extraction process is more complicated and costly than their shale-play counterparts; 2) the oil sands are farther away from most major refinery centers than most U.S. shale plays; 3) oil sands producers need to either add diluent to their bitumen to allow it to flow through pipelines, or transport low-viscosity bitumen in special “coil” rail cars that can be heated before unloading; and 4) existing pipelines out of the oil sands to the U.S. Midwest and Gulf Coast—and the existing Trans Mountain Pipeline to British Columbia (BC)—had been bumping up against capacity limits, resulting in significant, margin-erasing price discounts versus West Texas Intermediate (WTI), at least until incremental pipeline capacity started coming online in early 2015. We also noted that—for these and other reasons—RBN’s forecast for Alberta production in 2021 is far less upbeat than the recent 4-MMb/d estimate of Canada’s National Energy Board (NEB); we see the province’s production (now about 3.1 MMb/d) rising to only 3.4 MMb/d over the next five years under our Growth Scenario (with $65/bbl in 2021) and staying flat at best under our Contraction Scenario.

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We pointed out that a persistent problem for Western Canadian oil producers—the lack of pipeline takeaway capacity to Canada’s West and East coasts—continues. Then, in One Way or Another, we looked at the natural gas angle, discussing the facts that Western Canadian gas producers are still losing market share in Ontario/Eastern Canada to their Marcellus/Utica producers, and that plans for several liquefaction/liquefied natural gas (LNG) export terminals along BC’s coast have failed to advance. Prospects for LNG exports have been hurt by the current state of the worldwide LNG market (weak demand growth; a glut of new liquefaction/LNG export capacity; low LNG prices; and a reluctance by LNG consumers to make long-term commitments—see Too Much, Too Little, Too Late), but they’ve also been set back by delays in gaining regulatory approvals for liquefaction/export projects and for pipelines that would move gas to the coast from the Montney Shale play in northeastern BC and northwestern Alberta. In sum, the development of Canadian oil and gas infrastructure has been log-jammed for some time now, in part due to market conditions, but also because of the challenges of advancing major pipeline and LNG projects through the Canadian and provincial regulatory processes.

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